Can You Overdraft With a Debit Card? Understanding Your Options and Risks

It’s possible to overdraft your account with a debit card if you have signed up for your bank’s overdraft coverage. This can enable a transaction to go through even when the account is short of the funds needed to cover it. However, you may wind up paying expensive overdraft fees on your purchase or withdrawal.

Some consumers accept overdraft fees as a cost of doing business with their bank or credit union, preferring them over returned or declined payment. But many wish to avoid these fees. Read on for a closer look at what a bank’s overdraft service could mean specifically for debit card transactions.

What Does It Mean to Overdraft With Your Debit Card?

Overdrafting with a debit card means spending more than you have in your account, but the bank covers the charge.

If you don’t have enough money in your bank account to cover a debit card transaction, you can expect one of two things to happen.

•   Your bank may decline your request, leaving you empty-handed at the cash register or ATM.

•   Your bank could allow the transaction to go through. Technically, you will have overdrawn your account, because your account balance will fall below zero. But you’ll be able to complete your purchase or withdraw your cash.

The second outcome may be preferable, at least in the short term. However, your bank may only let the transaction go through if you participate in its overdraft coverage or protection program, and you can be charged a fee for this service.

What Is Overdraft Coverage vs Overdraft Protection?

Many financial institutions offer overdraft programs that will let your transactions go through, at least temporarily, if you don’t have enough money in your account. But the rules and fees for this service can vary significantly from one bank and bank account to the next, so it’s important to understand what you’re signing up for.

Standard Overdraft Coverage

Many banks offer some type of standard overdraft coverage for their consumer checking accounts. Generally, if you overdraw your account with a check, automatic bill payments, or recurring debit card transactions, the bank may process the transaction anyway (at its discretion and usually up to a certain limit). But it could cost you: Your bank may charge an overdraft fee. And you’ll still have to get your account back in the black ASAP to avoid multiple fees. While this coverage can prevent transactions from being declined, it can get pricey.

Overdraft Protection

Overdraft protection services work a little bit differently. With this type of program, your bank may provide a line of credit for the overdraft or you may designate a backup account, such as a savings account or credit card to cover any shortfalls. With a linked account, the bank will automatically transfer money to your overdrawn checking account.

An overdraft protection service may still involve fees — as well as interest for a line of credit — but the fees may be less than those of standard overdraft protection. Transfers from backup linked accounts are sometimes free. Before considering any overdraft program, it’s important to understand the specific terms and fees.

How Are Debit Card Overdrafts Different?

You may not have a choice when it comes to paying fees when you overdraw your account with a check or an automated clearing house (ACH) payment. If the bank approves the transaction, you can expect to pay an overdraft fee. If it declines the transaction, you’ll likely face a non-sufficient funds (NSF) fee. This charge means that even though the transaction wasn’t completed, you still will pay for the inconvenience the bank experienced due to the situation.

But your bank can’t charge you fees for overdrafts on most debit card transactions unless you have opted in to those charges.

Opt-In vs Opt-Out Policies

Deciding whether you want to pay or don’t want to pay overdraft fees on debit card transactions can sometimes be a complicated decision. Policymakers at the Federal Reserve decided in 2010 to change the previous process that involved having to opt out of overdraft coverage (that is, customers could be automatically enrolled in the service). Since then, bank customers have to opt-in to consent to fees related to overdraft for one-time debit card and ATM transactions.

If you opt in to debit card and ATM overdraft coverage, you may expect withdrawals and purchases, up to certain limits, to go through even if you don’t have enough funds in the bank at the time of the transaction. But you may be charged a fee in exchange for this service.

If you don’t opt in to debit card and ATM overdraft coverage, you may experience one-time ATM withdrawals and debit purchases being declined if you don’t have enough money in your account at the time of the transaction.

Keep in mind, though, that even if you don’t opt in to overdraft coverage for your debit card, you could still face fees. If you’re short of funds when the bank processes an automatic payment through your debit card, you might face an overdraft fee if the bank chooses to complete the transaction. And, again, if the payment is declined, you may be charged a nonsufficient funds (NSF) fee.

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Costs and Fees Associated With Overdraft Services

Federal regulators have proposed lowering overdraft fees to as little as $3, but currently, they average close to $30. And though some banks don’t charge overdraft fees on checking accounts, 94% of accounts at financial institutions still have them, according to a recent survey, and they can run as high as $38 or so.

Some banks also may charge what are known as continuous overdraft fees, or daily overdraft fees. These are charges assessed every day the account remains overdrawn, and the fees can add up quickly.

Your bank may waive the fee on a smaller purchase. Also, if it’s the first time you’ve overdrawn your account or it’s been a while since you did so, the bank might remove the fee if you call and ask.

Should You Overdraft With a Debit Card?

If you’ve opted in to debit card overdraft coverage (and any possible fees), it may seem worth the risk of an overdraft if you need some quick cash or to fill your gas tank when you’re low on funds. But if you have other resources — whether it’s a credit card or another account — you might want to use those first. Keep potential fees in mind, not to mention the stress of knowing your checking account will have a negative balance, when you consider this strategy.

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How to Avoid Overdraft Fees

Understanding how overdraft coverage works is one way to avoid triggering unnecessary bank fees. But there are other proactive steps you may want to consider, including the following:

Choose a Bank That Doesn’t Charge Overdraft Fees

Some banks don’t charge overdraft fees and often cover you up to a specific overdraft limit. Others may offer one or two fee-free account options. (If bank fees overall are an issue for you, keep in mind that online banks often have lower costs than traditional brick-and-mortar institutions as a result of having less overhead.)

Use Credit Cards for Emergency Expenses

If you have a relatively low-interest credit card or you’re able to pay off your credit card balance every month to avoid accruing interest, it may make sense to use your credit card for emergency expenses. Taking a moment to decide whether to use a debit or credit card before an emergency comes up could help you make the best financial decision for your circumstances.

Link Accounts for Overdraft Protection

Linking your checking and savings accounts can allow your bank to quickly move funds to cover negative balances. This may be free, in some cases, or if you do pay a transfer fee, it’s often less than an overdraft fee.

Build an Emergency Fund

Having an emergency fund that can cover six months’ worth of expenses is a good goal. However, even a smaller amount of savings may be enough to cover unexpected expenses that can trigger debit card overdrafts. A high-yield savings account may also help you grow your money while also keeping it accessible.

Steps to Help You Better Manage Your Debit Card

If the convenience of using a debit card has made it your go-to tool for accessing cash and making purchases throughout the day, there are steps you can take to prevent overdrafts.

Monitor Your Accounts

Using a tracking tool to monitor your checking account and other account balances can help you avoid an overdraft.

Set Up Low Balance and Other Alerts

If your bank offers account alerts, consider setting up a notification so you know when your checking account balance is getting low.

Know When Your Bills Are Due

Putting together a budget can help you pay your bills on time and organize your payment dates. Then, you might also see if you can move some payment dates. For example, you could ask your credit card issuer to shift your date. That way, your checking account won’t be drained by multiple payments in the same week or pay period.

The Takeaway

You may be able to overdraft your debit card transactions if you have overdraft coverage. This means your bank will cover the transaction, but you may be charged a fee for this service. If you choose not to opt into your bank’s overdraft services, there’s a good chance that a debit card transaction that would take your account into a negative balance would be denied.

The rules and fees for overdrawing your account with a check, automatic payment, or debit card can vary significantly depending on where you bank, so it’s a good idea to read all the information about your account when you sign up.

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FAQ

What happens if I overdraw with my debit card without overdraft coverage?

If you don’t have overdraft coverage and don’t have enough money in your bank account to cover the transaction you’re trying to make, your bank will likely decline the purchase or withdrawal. You won’t overdraft your account, and you may not face an overdraft fee. However, you may be charged a nonsufficient funds (NSF) fee.

How much does overdraft coverage typically cost?

Overdraft fees can vary depending on the bank and other factors, including whether you have a backup account or credit card linked to your checking account. One recent survey found an average fee of about $27. That said, some agencies have proposed rules in the past to lower those fees.

Can I overdraft using my debit card at an ATM?

If you have overdraft coverage from your bank, your ATM withdrawal may go through (depending on the bank), even if you withdraw more than you actually have in your account. You may be charged an overdraft fee for this service. If you don’t have or opt in to overdraft coverage, the transaction will likely be declined. While you won’t be charged an overdraft fee, in this instance, you may be charged a nonsufficient funds (NSF) fee.

Photo credit: iStock/megaflopp

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